World Trade Organization
Report of the High-Level Board of Experts on the Future of Global
Trade Governance
Revitalizing Multilateral Governance at the
World Trade Organization
Report of the High-Level Board of Experts on the Future of
Global Trade Governance
Contact
Dr Christian Bluth Project Manager
Global Economic Dynamics Bertelsmann Stiftung
Telephone +49 5241 81-81329 Mobile +49 173 73 42 656
christian.bluth@bertelsmann-stiftung.de Prof Bernard Hoekman, PhD
Chairman of the High-Level Board of Experts European University Institute
bernard.hoekman@eui.eu futuretradegovernance.org www.bertelsmann-stiftung.de
Contents
1
Preface ... 4
2
Members of the High-Level Board of Experts on the Future of
Global Trade Governance ... 5
3
Executive Summary ... 6
4
Revitalizing Multilateral Trade Governance ... 8
5
A changing global economic context ... 13
5.1 Preferential trade agreements ...16
5.2 Rising use of trade-distorting policies ...17
5.3 Measures affecting digital trade...19
6
Adjustment pressures and differences in social preferences and
economic systems ... 20
7
Three specific trade governance issues ... 23
7.1 Dispute settlement ...24
7.2 Economic development ...25
7.3 WTO working practices ...27
8
Recommendations ... 29
8.1 Policy dialogue on nontariff measures affecting competitiveness ...30
8.2 Foster substantive deliberation in WTO bodies...31
8.3 Open plurilateralism: initiatives among groups of WTO members ...35
8.4 Bolster the support function of the Secretariat ...37
8.5 Review of organizational performance ...39
8.6 Outreach and communication strategies ...41
9
Leadership ... 43
10
Concluding Remarks ... 45
11
References ... 48
12
Annex ... 51
12.1 Annex 1: Alternative Instruments for Trade Cooperation under the WTO ...51
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1 Preface
If international trade is not governed by rules, mere might dictates what is right. The World Trade Organization (WTO) serves as a place where trade policy issues are addressed, disputes arbitrated, legal frameworks derived and enforced. Through these functions, the WTO ensures that the rules of trade policy are inspired by fairness and reciprocity rather than national interest. It is more important than ever to vitalize the global public good that it rep-resents against various threats that have been undermining it.
Therefore, the Global Economic Dynamics project of the Bertelsmann Stiftung has called into life a High-Level Board of Experts on the Future of Global Trade Governance. Composed of eminent experts and seasoned trade diplomats, it elaborated a series of feasible policy recommendations that will increase the effectiveness and sali-ence of the WTO. We hope that this Report provides helpful suggestions in a time marked by increasing trade disputes and protectionism and instead contributes to stronger multilateral institutions and fora.1
The Bertelsmann Stiftung owes a debt of gratitude to Prof Bernard Hoekman, the Chairman of the Expert Board and author of this report. His invaluable expertise and experience, guidance and ability to bridge controversial opinions have been crucial in defining the work of the Board. We would also like to express our sincere thanks to all our Board Members, who generously contributed their expertise, time and networks. Without their dedication, this Report would not have been possible. Finally, we would like to thank Robert Koopman and Aik Hoe Lim of the WTO for their support throughout the whole process and Christian Bluth of Bertelsmann Stiftung for managing this common endeavour.
Aart De Geus Andreas Esche
CEO and Chairman Director, Program Megatrends Bertelsmann Stiftung Bertelsmann Stiftung
1The analysis and suggestions made in this report reflect the dominant view among the members of the Expert Board. Members of the
Board participated in meetings on a personal basis – the views expressed should not be attributed to any of the organizations Expert Board members are affiliated with.
2 Members of the High-Level Board of Experts on the Future of
Global Trade Governance
Bernard Hoekman (Chairman), Professor, Robert Schuman Centre for Advanced Studies, European University Institute and Research Fellow, CEPR
Chad P. Bown Senior Fellow, Peterson Institute of International Economics and Research Fel-low, CEPR
Andreas Esche Director, Program Megatrends, Bertelsmann Stiftung
Lionel Fontagné Professor of Economics, Paris School of Economics, University Paris 1 Panthéon-Sorbonne
Merit Janow Dean, Columbia School of International and Public Affairs
Stephen Karingi Director, Capacity Development Division, United Nations Economic Commission for Africa
Margaret Liang Associate Trainer to the Ministry of Foreign Affairs, Senior Fellow of the Ministry of Foreign Affairs Diplomatic Academy and Adjunct Senior Fellow, Rajaratnam School of International Studies, National Technological University, Singapore Xiankun Lu Associate Partner, IDEAS Centre, Geneva, and Associate Professor, Wuhan
Uni-versity and UniUni-versity of International Business and Economics (UIBE), China Aaditya Mattoo Research Manager, Trade and Integration, World Bank
Mari Pangestu Professor of International Economics, University of Indonesia and Adjunct Senior Research Scholar, Columbia University School of International and Public Affairs Angelos Pangratis Advisor Hors Classe for the European Economic Diplomacy, European External
Action Service
Marietje Schaake Member of the European Parliament Harsha Vardhana Singh Chairman, IKDHVAJ Advisers LLP
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3 Executive Summary
The trading system is in crisis. Urgent action is needed to revitalize its central organ, the World Trade Organization (WTO). Such action must come from its Members and be based on renewed multilateral dialogue on the use and effects of trade-distorting policies in both developed and developing nations. Dialogue is also needed to resolve conflicts regarding the operation of the WTO dispute settlement mechanism and to assess the functioning of the organization.
The fundamental consensus norm has been abused to resist multilateral discussion of new policy areas and con-cerns regarding the functioning of the organization. Members should reflect on whether WTO bodies provide them with the information they need to assess implementation of existing agreements and identify gaps where the rules need to be updated. Without discussing how the WTO operates, Members will not be able to create a framework for issues such as the governance of digital trade or how to enhance trade's contribution to societal goals. All WTO members benefit from the rules-based trading system. Participating in mega-regional trade agreements offers a complementary vehicle for cooperation to countries willing to deepen integration of markets, but this is not a viable alternative for many developing countries and risks fragmenting the rules that apply to global value chains. Nor will such agreements discipline key trade-distorting instruments such as subsidies.
Safeguarding the WTO is particularly important for smaller countries. Only the multilateral trading system offers them the opportunity to influence the development of new trade rules.
Friends of the multilateral trading system can pursue four complementary avenues to revitalize the WTO as a forum for trade cooperation and conflict resolution:
1. Policy dialogue. WTO members need to establish a new work program to address both long-standing and more recent use of trade-distorting policies that are systemically important. Dialogue is necessary for WTO members to determine what those issues are and to agree on a road map for the future. Dialogue should include a focus on the functioning of WTO bodies – the Committees overseeing implementation of WTO agreements, the Appellate Body and the dispute settlement system more broadly. It should encompass a process of self-reflection by WTO bodies to identify (i) how to enhance their usefulness to their constituencies; (ii) the information needed to enhance their relevance; (iii) whether trade measures help economic development; and (iv) how trade can be more fully used as a tool to realize the sustainable development goals.
2. Support open plurilateralism. Members need to consider whether all Members must participate in the launch of every new negotiation or initiative. Greater pursuance by groups of WTO members of open, non-discriminatory plurilateral initiatives offers the opportunity to move forward on issues where concerns about free-riding do not exist or can be addressed. Such initiatives do not require consensus to start. Others can always join the discussion when they are ready to do so. Four subjects are already being discussed in plurilateral groups. Others may emerge from the suggested policy dialogue processes.
3. Enhance the scope for the Secretariat to provide inputs. The WTO is a ‘member-driven’ organization in which
the Secretariat is given too little voice. Empowering the Secretariat to do more to support policy dialogue in WTO bodies and the work of WTO Members engaged in open plurilateral initiatives will bolster the trading system.
4. Review WTO institutional performance. The operation of the WTO as an institution is not subject to regular assessment. Establishing a review mechanism that incorporates self-assessment by WTO bodies can present Members with facts they may not be fully aware of, and information on working practices, Member engagement and outcomes.
A precondition for revitalizing engagement at the WTO is that its work program deal with matters of systemic import and does so without undercutting the scope for poor countries to pursue development policies. The recommenda-tions are aimed at satisfying these desiderata.
Policy dialogue is critical to establish a new work program. Such a work program must include subjects that matter to all WTO members. In practice this will mean a mix of old and new topics. Long-standing subjects of great im-portance to many WTO members include eliminating tariff escalation, managing global overcapacity in specific industries, disciplining agricultural subsidies, and protection of intellectual property. New subjects are likely to in-clude digital economy-related policies that may distort trade and investment in services, e-commerce regulation
and the development of (access to) new technologies. What is needed is a balanced work program that offers a credible prospect for addressing priority issues for all WTO members, whether developed, emerging or developing. Self-reflection in WTO bodies can help to (re-)establish a common understanding of the strengths and weaknesses of existing agreements. It can identify opportunities to expand cooperation in a policy area and enhance economic development impacts. Many WTO members want emerging economies to make more extensive trade policy com-mitments while developing economies cite their need to address their development challenges. Greater differentiation in the rights and obligations of developing countries is a sensitive political issue but is essential if development concerns are to be properly addressed.
A committee-by-committee process of deliberation – including the Dispute Settlement Body – can help re-build the trust needed for constructive, good faith engagement on substantive policy questions based on solution-oriented proposals. To do so, deliberations must be inclusive and engage the whole membership. Regular assessment of the performance of the WTO as an organization – spanning both WTO members and the Secretariat – will enhance transparency and improve information on implementation of WTO agreements.
There is no presumption that what is needed is a new round of multilateral negotiations. Nor that every Member must engage on every element of the work program. Policy dialogue may identify opportunities for cooperation that are not of interest to all WTO members. In such instances open plurilateral initiatives provide a mechanism for subsets of the WTO membership to deepen cooperation. Such initiatives differ from preferential trade agreements by being both open to any WTO member and not discriminating between participants and non-participants in the application of benefits. This is nothing new for the WTO – examples include the Information Technology Agreement and the Telecom Reference Paper establishing regulatory principles for telecommunication services. WTO mem-bers can decide to apply these agreements if they wish to. Open plurilateral initiatives permit countries seeking to retain policy space for development reasons to do so – they need not participate.
Objective and timely information is vital for constructive deliberation. The heterogeneity of the WTO membership implies that knowledge about issues and international experience may vary substantially across countries. Ensuring that the WTO Secretariat, working in conjunction with other international organizations, can provide the required support to WTO members is important. This includes better monitoring and analysis of implementation and effects of WTO agreements, information on the experience with approaches that have been used in preferential trade agreements for a given policy area, and synthesis of extant knowledge of development effects and good practices. If successfully implemented, the recommendations can help WTO members develop a road map to resolve current trade conflicts, clarify and improve the operation of the dispute settlement process, and move towards a trading system that entails greater use of open plurilateralism as a complement to the expansion of membership in mega-regional trade agreements. At the 2017 WTO Ministerial Conference in Buenos Aires the US called for WTO reform. In May 2018 President Macron did the same. Ideally, all large players, jointly with others, will work together to consider reforms to the WTO.
Due in part to the rise of global value chains and the success of the system, many more countries are today partic-ipating in international trade. This creates opportunities and incentives for groups of WTO members to take on a greater role. Different possibilities may exist to constitute a critical mass large enough to provide leadership. For instance, three of the four largest trading powers – China, the EU and Japan – account for more than one-third of world trade in goods and services and more than half of the WTO budget.
Leadership cannot come from large trading powers alone. Even more powerful would be if East Asia as a region played a greater role, with shared leadership between China, Japan and middle powers such as Korea and Indo-nesia (combined with ASEAN). A coordinated effort to invest more of their soft power to support reform initiatives could do much to change the dynamics.
Economies pursuing deep integration of markets are best placed to play a complementary, catalytic role. Examples include the members of the Comprehensive and Progressive Agreement on Trans-Pacific Partnership, the Pacific Alliance, the East Asian countries in the Regional Comprehensive Economic Partnership, and, more broadly, the WTO ‘Friends of the System’ group of smaller economies. Together with the EU these countries account for more than 75 percent of world trade. They constitute a critical mass that can help sustain multilateral cooperation and drive the trading system forward.
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4 Revitalizing the WTO
The World Trade Organization (WTO) plays a central role in global trade governance.2 An open world economy requires a governance framework that establishes ground rules for economic operators and governments. The mutually agreed rules embodied in the WTO agreements reduce uncertainty for firms regarding the policies that apply to their products in foreign markets. Preserving an effective multilateral trading system is vital to help countries cooperate in managing rapid structural change and transformation.
International trade is at a crossroads. The ongoing shift away from agricultural and assembly line manufacturing activities that are predominantly national in nature towards geographically dispersed international production net-works and a rising share of total value added created by services activities calls for updating the prevailing governance framework. Efforts to undertake such updating have been stymied by disagreements among WTO members regarding the priorities for the multilateral trading system. These disagreements inhibit the scope for the organization to perform its role as a venue for deliberation and rule-making, monitoring and enforcement of mutually agreed policy commitments.
The failure to conclude the first multilateral round of trade negotiations held under WTO auspices, the Doha Devel-opment Agenda, has had serious consequences. These go beyond the significant opportunity cost of global welfare gains foregone from not disciplining the use of trade-distorting policies that have long been on the agenda of the WTO – such as agricultural support and tariff escalation. The Doha round failure has impeded WTO members from addressing new sources of policy tension and engaging in a collaborative effort to update WTO rules to reflect the changes that have occurred in the global economy in the 25 years since the WTO treaty was negotiated.
The difficulty in making progress in negotiating new agreements in the WTO has increased incentives for WTO members to negotiate preferential trade agreements (PTAs). The number of PTAs has been rising steadily since the early 2000s. More than 400 PTAs are in force today, some of which span more than one region of the world. Resort to PTAs reflects many motivations but a common element is a willingness of participating countries to en-gage in deeper integration than they deem desirable or feasible in the broader multilateral setting. Such agreements complement the WTO – and the WTO makes explicit provision for them – but they are at best only a partial substi-tute for globally welfare-enhancing multilateral cooperation on trade policy.
Challenges
The effects of greater international economic integration are increasingly contested in high-income countries. Sus-tained high rates of economic growth in several large developing countries have resulted in major shifts in global output and trade shares. As average per capita incomes in these nations have risen, the global distribution of income has become less unequal. However, within most economies, the opposite has occurred: income inequality has increased as skilled workers and owners of financial assets have experienced higher rates of income growth than less skilled workers. The role of trade and trade liberalization as a driver of greater inequality and stagnation in average household incomes of the middle class in many countries is hotly debated. Empirical research demon-strating that trade is not the major driver of these trends – they are primarily the result of technical change and domestic policy choices – has had little impact on domestic political debates. Trade agreements have become a focal point for criticism.
Arguments against trade agreements and the trading system span a wide spectrum, including businesses, NGOs and citizens more generally. Protests against recent EU trade negotiations with Canada and the US as well as opposition in the US by leaders of both major political parties against the Trans-Pacific Partnership and the North American Free Trade Agreement demonstrate that the idea and value of rules-based trade is being questioned.
2 This report draws on several meetings by the board of experts and background papers and presentations by Robert Basedow, Aaditya Mattoo,
Kamal Saggi, Hector Torres and Robert Wolfe. It has benefitted from suggestions by Robert Koopman and Aik Hoe Lim, numerous trade officials and participants in seminars and workshops at the EUI, the WTO Public Forum (2017), the Trade and Development Symposium (Buenos Aires, 2017), the Asian Leadership Conference (Seoul, 2018), the 2018 Shanghai Forum and the Global Solutions Summit (Berlin, 2018). Thanks are due in particular to Simon Evenett and Piotr Lukaszuk for generously sharing data from the Global Trade Alert initiative and to Benedikt Dengler for excellent research assistance.
There are deep-seated perceptions in major emerging economies such as China and India that the WTO is unbal-anced and treats them unfairly. Conversely, many OECD member countries argue that China and other emerging economies engage in trade-distorting policy practices that skew competition in favour of national companies (Wu, 2016). Consumers and citizens worry about the fairness of trade and ensuring that national governments retain the autonomy to regulate economic activity to realize fundamental societal goals.
A basic question confronting the international trade community is how trust in the global rules-based trading system can be restored and reinforced. Sustaining an effective multilateral trading system is critical in helping governments address the concerns briefly enumerated above. Reversal of trade liberalization and rejection of trade policy com-mitments made in the WTO or in regional trade agreements is not a solution. Doing so will simply increase trade costs and raise prices of products for consumers. Instead of increasing domestic investment, employment or wages it is more likely to have the opposite effect.
All WTO members stand to gain from concerted efforts to cooperate on the trade-related policies that are of concern to stakeholders and that underlie the recourse of some countries to unilateral trade policy actions. This applies as much to the US as it does to China, India, other Asian nations, African countries, the EU or any other WTO member.
Large OECD trade powers such as the EU, Japan and the US need a functioning multilateral trade re-gime because most of the concerns they have raised regarding foreign trade practices cannot be addressed effectively – or efficiently – on a bilateral basis. Any deal with one country will be eroded by a mix of market forces that drive investment towards other countries. Many trade practices that create neg-ative spill-over effects are not unique to one country.
Large emerging economies need a functioning multilateral trade system because they do not have bilateral or regional trade agreements with their main trading partners and have not participated in recent efforts to conclude deeper economic integration arrangements. The WTO provides the primary locus where they can participate in setting the rules for new areas of policy in which they have a great stake – such as e-com-merce or digital trade and investment.
Developing countries need a functioning multilateral trade regime because they have little market or nego-tiating power vis-à-vis large trading nations or blocs. The rules-based multilateral trading system provides the basic foundation for the effort that many developing countries are undertaking to integrate markets on a regional basis. An important example is the African initiative to create a continent-wide integrated regional market for goods and services.
Citizens of countries concerned with ensuring that trade supports societal goals and sustainable develop-ment need a functioning multilateral trade regime that upholds and bolsters the ability of governdevelop-ments to take actions to achieve these objectives.
Unfortunately, recent developments regarding the multilateral trade system are troubling. The United States – a nation that played an important leadership role in the design and operation of the WTO and its predecessor the General Agreement on Tariff and Trade (GATT) – has become increasingly dissatisfied with the organization.3 But the US is not alone. Many countries are frustrated. Some are strongly of the view that the organization needs to develop a new work programme that encompasses the unresolved policy agenda that was at the heart of the Doha round as well as new issues of increasing concern to businesses and consumers, such as e-commerce, subsidies and investment-related policies. Others, including many developing countries, insist that efforts to discuss ‘new’ (non-Doha) subjects can only be considered once the Doha agenda subjects that matter to them have been re-solved.
3 At the 2017 Ministerial Conference in Buenos Aires the US Trade Representative laid out a WTO reform agenda spanning compliance with
WTO obligations, notably notification requirements, clarifying the understanding of economic development within the WTO and more generally a joint reflection on the question whether playing by current WTO rules makes it harder to achieve economic growth, revitalizing standing WTO bodies to ensure they are focused on new challenges, and action to re-consider the current litigation structure. See
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The problems go beyond the inability to conclude the Doha round. WTO monitoring efforts (WTO, 2017a) and the Global Trade Alert initiative4 reveal that many countries use a wide variety of non-tariff policies to increase incen-tives for local production or exports (Evenett and Fritz, 2017a,b).5 Often these do not violate the letter of WTO law but nonetheless may distort trade. Some threaten to undermine the system. The recent invocation of national se-curity concerns for the imposition of tariffs and quotas on imports of selected products by the United States is a prominent recent example. Such measures create systemic risks given the prospect of tit-for-tat imposition of trade-distorting measures and greater use of national security justifications by WTO members for the imposition of pro-tectionist measures. Such a development would be detrimental to all countries involved as well as the rest of the world. Nicita, Olarreaga and Silva (2018) estimate that a full-blown trade war in which all countries engage in tit-for-tat tariff setting would raise import duties facing the average exporter by 32 percentage points. Such a major increase in taxation would have significant negative effects on global demand and economic growth. Avoiding such an outcome is in the interest of all WTO members.
Another worrisome recent development is the US refusal to agree to appointments of new Appellate Body (AB) members as the term of sitting members expires. If this matter is not resolved, the Appellate Body will be down to 3 members in September 2018, the minimum needed to consider an appeal, and will cease to be operational at the end of 2019 when two more vacancies arise. This constitutes another systemic risk if it leads to unilaterally deter-mined retaliation in cases where dispute settlement panel reports are not adopted.
Sustaining the WTO dispute resolution mechanism – generally held to be a major global governance innovation – is critically important for the organization. Numerous proposals have been made in the last 15 years by WTO members to improve and clarify the current conflict resolution system in the context of a review of the Dispute Settlement Understanding. However, the need for consensus and a desire by WTO members to make reforms to dispute settlement part of a larger “package deal” that encompasses other subjects (even though formally the dispute settlement review was not part of the Doha round) has impeded agreement on reforms.
The 11th Ministerial conference in Buenos Aires in December 2017 ended without a Ministerial Declaration and without agreement on the sole subject where a deal was potentially in reach – on disciplines on fishery subsidies. The former reflected disagreement on what in the past would have been considered innocuous ‘motherhood and apple pie’ language on economic development and multilateralism, while the latter ran aground on resistance from both ends of the subsidy spectrum – nations supporting large high seas fishing fleets as well those reliant on artisanal fishing – to banning fishery subsidies. The business community was missing in action. CEOs did not call their Presidents and Prime Ministers, nor did national leaders engage effectively with each other before the confer-ence (Wolff, 2017).
Notwithstanding these factors, the Buenos Aires meeting had an important positive outcome that offers scope for some optimism for the future. Groups of WTO members agreed to launch talks on four policy areas: E-commerce; obstacles to trade confronting micro, small and medium-sized enterprises (MSMEs); investment facilitation; and domestic regulation of services. These initiatives provide an important signal that many countries – both developed and developing – are willing to pursue cooperation on trade policy matters in the context of the WTO. Noteworthy as well was that several developing countries played a leadership role in getting these initiatives launched.
Responding to the challenges
The WTO has a central role to play as a forum and framework for countries to manage trade tensions and conflicts. The trading system is a key instrument for attainment of the Sustainable Development Goals – it is only through the WTO that agreements can be concluded to reduce policy distortions in world agricultural markets that negatively
4 See, e.g., Evenett and Fritz (2017a) and more generally http://www.globaltradealert.org.
5 Between 2009 and April 2018, Brazil, China, India, Indonesia and South Africa implemented a total of 2,327 trade-distorting measures,
ac-counting for 22 percent all such measures captured in the GTA database. India accounted for almost 40 percent of the measures undertaken by these 5 large emerging economies. Slightly more than half of the measures involved were subsidies or targeted investment; 13.5 percent involved import tariffs and 25.5 percent took the form of trade defense instruments such as antidumping.
affect developing countries, discipline the use of trade-distorting subsidies, remove barriers to trade in environmen-tal products, or support integration of small-scale enterprises into value chains through global trade and investment facilitation in an increasingly digital economy.
Multilateral negotiations on rule-making are just one dimension of the WTO’s functions. The WTO plays a vital role in fostering transparency of trade, monitoring the trade policies of members and providing a platform for delibera-tion. The Secretariat provides support services for regular interactions at technical level between members, as well as the adjudication of disputes. On most of these dimensions PTAs cannot compete. Indeed, it is not sufficiently recognized that the WTO provides the basic infrastructure of rules for PTAs, as these invariably refer to and gen-erally build on WTO provisions. Weak institutionalization of PTAs means they often rely on WTO notifications and even dispute settlement.6 Moreover, while there are exceptions, for example, the Comprehensive and Progressive Agreement on Trans-Pacific Partnership (CPTPP), which includes disciplines on e-commerce policies and state-owned enterprises, most PTAs do not deal with areas of policy that can generate global spill-over effects – such as the use of various types of subsidies.
Some observers have argued the trading system is like a bicycle (Bergsten and Cline, 1982) in that it needs to keep moving to stay upright: regular progress is required on rule-making on trade policies for countries not to revert to protectionism. Sceptics have contested this ‘bicycle theory’, arguing that, in a common law framework, new rules emerge through various forms of interaction and that the institutional framework provided by the WTO to monitor trade policies and to resolve trade disputes was robust. This ‘tricycle’ view sees the WTO as a more stable mech-anism for cooperation. The inability to finish the Doha round, the stalemate on new Appellate Body appointments, and increasing use of trade-distorting policies in several WTO members implies that the tricycle is stuck. The chal-lenge is to get it moving again and to steer it in a direction that is in the interest of all its members.
What the destination should be is a matter for WTO Members to determine. What is clear is that the destination is not ‘free trade’. The Preamble to the WTO text states that the goal of organization is “raising standards of living, ensuring full employment (and) expanding the production of and trade in goods and services.” To contribute to these objectives, it fosters “reciprocal and mutually advantageous arrangements directed to the substantial reduc-tion of tariffs and other barriers to trade.” All these objectives are placed in the context of “allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and enhance the environment.”
It is insufficiently appreciated by both trade critics and advocates that the WTO is primarily a mechanism to govern national commercial policies: agreeing and implementing a body of rules and good trade policy practices to which members commit themselves. Agreements not to exceed certain tariff levels (so-called tariff bindings) and to abide by jointly agreed procedural rules make trade policies more predictable, transparent and less burdensome to trad-ers. The associated reduction in uncertainty is the primary product of the WTO. This has significant value in and of itself, whatever the incremental reduction in applied trade barriers that may be agreed through periodic trade ne-gotiations or accession to the organization by new members.7
It is fruitless to engage in finger-pointing or apportioning blame for rising trade tensions. The priority is to prevent escalation of trade conflicts and unilateral resort to trade restricting measures that damage all WTO members. The immediate need is to avoid further erosion of the WTO’s credibility. This includes preventing backsliding by WTO members towards unilateral use of protectionist trade policies and ensuring that disputes are resolved effectively and efficiently. Other challenges centre on bolstering cooperation to leverage trade for sustainable development and adapting to the new realities of global production and trade in services and digital products.
Inertia and complacency reflected in a ‘business as usual’ approach to the daily activities of the institution ignore the serious threat of unravelling much of what has been achieved in recent decades. Continued cooperation cannot
6 Many specific rules embodied in PTAs are often copied and pasted from relevant WTO agreements. This is frequently the case for disciplines
on the use of product standards and trade defence instruments.
7 The economics literature has stressed the role that international agreements can play as a policy commitment device (Maggi and
Rodriguez-Clare, 1998) and the associated effects of this in curbing uncertainty, and thereby supporting greater trade. The salience of the latter motivation increases in periods of economic distress (Carballo, Handley and Limão, 2018). Francois and Martin (2004) discuss the role that policy com-mitments in trade agreements can play in reducing uncertainty for firms (investment). Handley (2014) and Handley and Limão (2015, 2017) are recent papers that provide estimates of the economic effects of such uncertainty reduction.
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be taken for granted, even if trade tensions end up being contained. The call by President Macron of France at the OECD ministerial meeting in May 2018 to launch talks on WTO reform is a positive development, which hopefully will be pursued by the WTO membership. The costs of a gradual erosion in the salience of the WTO will be signif-icant, especially if this is associated with an increase in uncertainty and recourse to protectionist measures. Small countries that make up most of the WTO membership have the most to lose from a resurgence in the use of unilaterally determined trade policies in major export markets as they have little market power and benefit from multilateral rules as opposed to having to satisfy differentiated and potentially conflicting trade policies in major export markets. Beyond the losses from potential reversals in trade policies, the opportunity cost of the world losing the primary platform through which Members can collectively govern international trade relations is likely to be very high for all countries.
This report
The main goal of this report is to make specific suggestions on how WTO members can revitalize the WTO. It is based on discussions among Board members, written contributions by several members, and meetings with trade practitioners.8 The report does not take a view on the relative merits or importance of substantive policy issues that have been or should be the subject of rule-making efforts, although it will refer to specific subjects that have been or may become the subject of discussion as a result of changes in the structure of the world economy. A huge literature exists on the Doha round specifically, the effects of trade-related policies more generally, and priorities and options for multilateral cooperation. This is not re-visited here.9 The focus is on what could be done to increase the effectiveness of the WTO as an institution through which countries can define priorities, address policy spillovers and cooperate for mutual benefit.
A premise is that WTO working practices diminish the effectiveness of the organization. Insistence that Ministerial mandates define what can be discussed in the WTO, that all developing countries must be treated equally in terms of special and differential treatment, independent of size, export capacity or per capita GDP, and a willingness to accept that consensus can be used to block the normal operation of the WTO are examples of working practices that have eroded the efficiency of the institution as a forum for trade cooperation and practical problem solving. These practices often reflect tactics in the service of negotiating strategies pursued by WTO members to achieve specific goals. Identifying better processes and approaches to help countries achieve their objectives is a necessary condition for improving the effectiveness of the WTO.
Previous reports on the WTO have recommended changes in the governance of the organization.10 We refrain from suggesting major reforms to the existing governance framework. Proposals in earlier reports and the policy re-search literature on WTO governance have mostly been ignored. The lesson is that top down, external, ‘technocratic’ approaches seeking to redesign the basic governance mechanisms of the WTO are doomed to fail. The institutional framework that has been put in place over many years reflects the revealed preferences of the membership. This framework provides great scope for Members to pursue pragmatic and flexible approaches to improve the effectiveness and utility of the WTO as a mechanism to attain national objectives. A necessary condi-tion for progress is a willingness by a plurality of members to engage in efforts to improve the operacondi-tion of the organization and to reconsider some of its working practices.
Although the trading system is today under significant pressure, it is important to recognize that there are many positives. Much has been achieved by the WTO membership since the organization was established in 1995. The
8 The report draws on background papers prepared for this project (Basedow, 2017a and 2017b; Wolfe, 2018); as well as other analyses of the
functioning of the WTO and the challenges it confronts. The latter include Torres (2017a,b), Steger (2009), Baldwin and Low (2009), Mattoo and Subramanian (2009), Draper et al. (2015), Elsig (2016) and Evenett and Fritz (2107b).
9 Samans et al. (2016) summarize the recommendations of a major effort to identify priorities, options and opportunities for multilateral
cooper-ation across a wide range of trade-related issues. Reasons for the demise of the Doha round have been analyzed extensively (e.g., Zedillo, 2007; Martin and Messerlin, 2007; Laborde and Martin, 2015; Wolfe, 2015). Views differ, but most observers point to a mix of the following factors: the choice of negotiating agenda and modalities, domestic politics – especially governments with very thin majorities, the boom in global trade during the first 7 years of the talks (before the 2008 financial crisis erupted), and extensive economic policy reforms implemented unilat-erally by many countries that left mostly sensitive products with above average levels of protection to be negotiated.
track record of dispute settlement cases brought forward by WTO members – over 500 to date – is quite good. Accession to the WTO of 36 new members since 1995 illustrates the value accorded to the system. The accession of China was a landmark development. The negotiation of a Trade Facilitation Agreement (TFA) in 2013 and a ban on agricultural export subsidies are two major achievements realized in the past five years. The TFA embodies extensive differentiation across developing countries, complementing previous WTO Agreements that treat devel-oping countries differently based on income levels or export market shares, demonstrating the feasibility of differentiating between countries.11
A complementary initiative launched under WTO auspices has resulted in an expansion of development assistance to strengthen trade capacity (‘aid for trade’). This includes the establishment of the Enhanced Integrated Framework to assist Least Developed Countries (LDCs), another significant achievement reflecting a recognition that to benefit from market access opportunities many developing countries need assistance to enhance supply capabilities. There have also been successful initiatives to reduce barriers to trade in specific products among a subset of the WTO membership, most notably the Information Technology Agreement (ITA), the coverage of which was ex-panded in 2015. These attainments illustrate that progress has been made on several important fronts. There is much to build on.
5 A changing global economic context
The global economy has changed substantially in recent decades. Growth in international trade, cross-border in-vestment and knowledge flows has supported major reductions in global poverty, increasing real incomes of hundreds of millions of people in low-income countries. Households in richer nations have also benefitted greatly, as greater competition has driven down prices of goods, fostered innovation and increased the variety and quality of products. Trade liberalization and the associated integration of product markets is just part of the story. Structural transformation driven by technological change has been and will continue to be a major force affecting labor mar-kets independent of trade. Rapid expansion of the digital economy, reflected in shifts to e-commerce, the servicification of manufacturing and associated cross-border flows of data, services and digital products is changing the demand for skills and the organization of international production.
Developing and emerging economies have come to account for almost half of the value of global merchandise trade and global GDP. Reforms pursued by developing countries and transition economies have supported a major expansion in export-oriented manufacturing production in many of these countries. The corollary of this growth in manufacturing activities in emerging economies has been a decline in relatively unskilled employment in manufac-turing in OECD member countries. Much of the growth in manufacmanufac-turing output and employment has occurred in China (Figure 1), helping to explain why China has been at the centre of attention in debates about the distributional effects of globalization and the competitive implications of its rapid export growth. China has become a major trade partner for many countries around the world.
The rapid increase in China’s share of global trade has given rise to increased scrutiny of China’s economic policies and their consistency with WTO rules. In recent years China-related cases have accounted for most of the disputes brought to the WTO by the four largest trading powers against each other (Wu, 2016). Looking forward, one of the major challenges confronting the trading system is addressing tensions that have arisen because of gaps in the WTO rulebook that inhibit the ability of WTO members to determine whether certain types of policies distort com-petition.
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An increasing share of global trade comprises intermediate inputs, with value added generated in many countries (Baldwin, 2016). Supply chain-based production and trade has driven a steep fall in the ratio of domestic value added to total gross output in most countries, as an increasing share of value added embedded in products is imported. This is observed for all types of products, not just manufactured goods (Figure 2). The rise in the import content of domestic production reflects increasing specialization by firms. The associated reorganization of global production by companies to exploit the comparative advantages of different countries and locations has greatly increased economic interdependence.
A core feature of this process of specialization and rising mutual dependence reflected in multi-country supply chain-based production has been large flows of inward and outward foreign direct investment (FDI). In many countries a significant share of domestic production is now undertaken by affiliates of foreign companies (Figure 3), implying that national income and employment is in part generated by foreign-owned companies. FDI is a mechanism through which countries can acquire access to new technologies and knowledge, as well as to the distribution channels needed to sell products in export markets. Stocks of FDI are particularly large in ASEAN, the EU and the US – regions where the share of supply-chain-based trade is high. Inward FDI as a share of GDP is relatively low in China and has not increased substantially since the mid-1990s. This may in part reflect the policy stance towards FDI. China’s outward FDI has been growing in the past decade, although it remains relatively low compared to higher income countries.
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FDI is important for services providers to be able to supply services to foreign customers. Although services are rapidly becoming more tradable, to date establishing production facilities in a foreign market is often necessary for a firm to be able to supply services to foreign clients. The data in Figure 2 show that the extent of internation-alization of the production of services is far below what is observed for manufacturing or agricultural production. The average ratio of domestic value added to the value of total production (gross output) in manufacturing is around 0.25, i.e., 25 percent. For services it is a bit less than 0.6. The ratio has been falling over time, but it is more than double what is observed for manufactured products. Looking forward, technological changes permit-ting services to be digitized and automated will permit an increasing share of total output to be sourced from other countries. While the extent of fragmentation of production of services that will emerge in coming years is not known, the data indicate that in principle there is great scope for internationalization of services. This calls for a governance framework to guide firm behaviour and activities and to ensure that domestic regulatory goals are met.
The far-reaching interdependence, specialization and fragmentation of production that is part and parcel of the process of globalization relies on firms being assured that the policy environment in which they operate is predict-able. This is especially the case in industries where firms must make large investments with long time horizons. Actions to restrict trade, such as increases in tariffs on goods, or measures that constrain the scope for foreign investors to exploit their competitive advantages, will have effects on all firms and countries that participate in international production networks. The efficient operation of the value chains that drive trade today requires not just low barriers to trade but a stable and predictable policy framework. This extends beyond trade policy – the ability to enforce contracts and protect property rights, including intellectual property, matters for the feasibility of countries to participate in value chains and the willingness of firms to invest in them. The WTO provides a basic framework of rules for trade-related policies, but there also policy areas that are not, or only partially, coved by the WTO. Policies towards FDI and digital trade are two prominent examples.
5.1 Preferential trade agreements
An important trend affecting the economic landscape has been the growth in the number of PTAs. Such agreements are allowed for by the WTO. PTAs go further than the WTO in liberalizing trade: applied tariffs on substantially all
trade between partner countries must in principle be reduced to zero (although WTO rules do not require this to be the case for PTAs between developing countries). PTAs increasingly go beyond the removal of border barriers to cover matters not subject to the WTO. Examples include rules governing access for foreign investment, cross-border data flows, the digital economy, and dimensions of domestic regulation (e.g., competition policy; public procurement; regulatory cooperation). PTAs in North America (NAFTA), Europe and East Asia (e.g., ASEAN and related trade and cooperation agreements) have supported the pattern of specialization and rising ‘foreign’ content of domestic production illustrated in Figure 2.
Recourse to PTAs spans both developed and developing countries. Recent examples of ‘mega-regional’ PTAs include the CPTPP, ongoing negotiations on an East Asian Regional Comprehensive Economic Partnership (RCEP) that are due to be completed this year,12 the effort to negotiate a Trade in Services Agreement (TiSA), and the recently signed African Continental Free Trade Area (AfCFTA). Such initiatives are complemented by a plethora of bilateral PTAs, including a large network of agreements negotiated by the EU. Notable recent initiatives that include far-reaching provisions to integrate product markets are the EU’s PTAs with South Korea, Canada and Japan. Another important example is the trans-Tasman Single Economic Market established by Australia and New Zealand in 2009.
The steady expansion in the number and average depth of PTAs reflects continued strong interest in international trade cooperation by governments around the globe.13 Such initiatives illustrate that rules can be agreed on for new issues (as was done in the CPTPP) and that PTAs may provide a catalyst for greater integration through consolidation and gradual expansion of membership. In order to play this role, deeper PTAs should have an open accession clause – that is, permit additional countries to negotiate participation.
PTAs are an important instrument for countries with an interest in reducing barriers to trade and pursuing deeper integration of product markets. They are also a mechanism through which countries may seek to address the structural changes and economic power shifts that have occurred in the last three decades. At the same time, PTAs are discriminatory by design and in effect, generating potential trade diversion as well as steering policy attention away from matters that call for multilateral cooperation. Measures to open regionalism by applying PTA commit-ments on a non-discriminatory, most-favoured-nation (MFN) basis, as has been done in the ASEAN context, would help ensure that PTAs benefit non-members. But PTAs can only deal with global externalities in a partial fashion. They cannot attenuate the negative economic spill-overs created by national policies of countries that do not par-ticipate in them.
5.2 Rising use of trade-distorting policies
WTO trade policy review reports and the Global Trade Alert document the fact that many measures have been imposed by governments since 2009 that potentially distort trade. The trend is worrisome – a significant share of total imports is affected by such measures (Figure 4). Emerging economies and the United States have been the most prolific users of trade policy instruments in the post-2008 period. Other countries have been more restrained but the trend is upwards in many countries.
12 There is significant overlap in the membership of some PTA initiatives. For example, seven of the members of the CPTPP are also participating
in the RCEP negotiations.
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Most of the policy instruments captured in Figure 4 are non-tariff measures. Motivations for the use of such policies vary but a common factor is to support domestic economic activity. This need not be limited to measures that assist national firms. Governments also may seek to attract foreign-owned companies to their territories. Foreign compa-nies are more likely to have high productivity, better technology and stronger innovative capacity than local firms. They also create demand for workers, both skilled and less skilled, thus stimulating local employment. Another motivation that is likely to be common to many countries imposing policies that distort trade – especially trade remedies such as anti-dumping and countervailing (anti-subsidy) duties – is to manage import competition. The use of such measures – the fourth most commonly observed instrument since 2009 (Figure 5) – is permitted by the WTO to respond to what has been collectively agreed (defined) to constitute injurious unfair trade practices. About half of all trade measures imposed by governments since 2009 take the form of subsidization and support for exports through fiscal incentives of various types. These are only partially covered by WTO disciplines. The same is true for measures such as public procurement and investment incentives.14 The data reported in Figures 4 and 5 suggest WTO members need to engage in a discussion regarding the international effects of both old and newer types of trade-related policy instruments and the potential need for updating the WTO rulebook. The agenda here includes ‘old’ trade policy instruments that featured on the Doha round agenda – tariffs, other border barriers and agricultural support measures. These instruments account for a significant share of observed measures and are important to many developing nations.15 But the main message of Figure 5 is that various forms of domestic subsidies are among the most frequently used trade-distorting instruments.
14 Members of the plurilateral Agreement on Government Procurement are subject to rules on procurement; other WTO members are not. 15 Some policies that matter significantly for many developing countries – e.g., agricultural support policies and tariff escalation – would have
5.3 Measures affecting digital trade
An area of trade policy that is of increasing salience is measures affecting trade in digital products and services. Cross-border digital transactions are growing rapidly and, going forward, will comprise an increasing share of global production and trade. The data on trade policy trends discussed above include many measures that affect digital trade but are oriented more towards policies that affect production and trade in goods. A recent effort to assess the policy stance of countries towards digital trade by Ferracane, Lee-Mikayama and van der Marel (2018) reveals great variation in the extent to which countries implement policies that inhibit digital trade. Large emerging econo-mies maintain more restrictive policies than OECD member nations (Figure 6). Many of the policies concerned are only partially covered by WTO agreements. These policies can have significant negative spill-overs on trade and call for multilateral cooperation to devise efficient regulatory approaches that facilitate digital trade while attaining national objectives regarding consumer safety, data privacy and national security.
More generally, services account for upwards of three-fifths of GDP and employment in higher-income countries. On average, one third of the value of globally traded goods reflects services inputs. An implication is that the com-petitiveness of firms depends on the productivity performance of services sectors, which in turn is affected by prevailing services trade policies. Restrictions on trade in services are often higher than barriers against trade in goods (Borchert, Gootiiz and Mattoo, 2014). To date, the WTO has done very little in this area, as the priority was given in the Doha round to policies distorting trade in goods – a decision that arguably was a factor undermining the negotiations.16 In the case of e-commerce and internet-enabled transactions WTO members have periodically committed not to impose customs duties on electronic transmissions, but little progress has been made on rules of the road for domestic regulation that negatively affects the efficiency of the digital economy and the ability of foreign
16 One consequence of the decision to sequence the negotiations to put agriculture and non-agricultural market access issues first, little attention
was given to services, reducing the incentives for firms accounting for most employment and economic activity in higher-income countries to lobby for a Doha Round outcome, including on agriculture. This led a subset of countries to decide in 2013 to engage in negotiations to establish a Trade in Services Agreement (TiSA) outside the WTO. These talks made substantial progress in developing an expanded set of rules for services policies but were put on hold in 2017 by the Trump administration.
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firms to provide services. As the world economy becomes ever more interconnected because of the “Internet of things”, e-commerce and cross-border trade in services, cooperation on policies that affect digital trade and data flows will become more important for firms and consumers.17
6 Adjustment pressures and differences in social preferences and
economic systems
Trade expansion has supported rising average levels of national income, improvement in human development indicators and reductions in poverty headcount ratios. But not everyone has benefited equally and some have been adversely affected. The gains from trade are only realized because of painful adjustments incurred by firms that cannot compete with more efficient or innovative foreign enterprises. Workers in firms and industries that are not competitive must find alternative employment in more dynamic firms and sectors or accept lower wages. Such adjustment pressures are not just due to trade or globalization more broadly defined. New technologies continu-ously impact on labor markets by changing demand patterns and the organization of production. Some technologies may have negative impacts for workers in non-tradable jobs (e.g., domestic transport), others may make formerly non-tradable jobs subject to international competition. Looking forward, technical change may generate more “off-shoring” of tasks as products are digitized and exchanged cross-border as trade in services. This will generate new employment opportunities as digitally-enabled activities expand, but not all workers will be able to transition to new jobs without assistance.
17 A feature of the Internet of Things, 3D printing and related technologies is that they blur the contours of regulatory framework applying to
different services that may be provided using the same technology platform. This has implications for regulatory frameworks, calling for more cooperation amongst regulators from different countries.
The transitional costs of adjustment can be very significant for affected workers, households and communities.18 There are strong reasons for governments to respond to such costs. The displaced workers who incur the costs of adjustment are producing the gains associated with policy change and technical change and for that reason warrant assistance. It is well understood that governments must put in place compensation mechanisms for market opening to make everyone better off. Such compensatory policies need not detrimentally affect national competitiveness vis-à-vis countries that do not so, if they are designed to enhance the ability of workers to meet the changing demand for skills by employers. In practice, estimates of the extent to which formal trade adjustment assistance and other transfer programs offset losses suggests that the offset is substantially less than complete (Claeys and Sapir, 2018).
Lamy (2009) has pointed to a ‘Geneva consensus’ that the focus of policy should be on domestic and international policies to “help translate more open trade into real, increased and perceived benefits” for citizens. From the per-spective of the WTO and the global trade regime it is essential to note that compensation is a matter for domestic policy. Given that trade is just one source of adjustment pressure – technological change and macroeconomic fluctuations are more important – income insurance and appropriately structured active labour market policy are called for. Domestic social policies across countries vary in their effectiveness in providing safety nets and assis-tance to find alternative employment. In practice, most governments have relied on economic growth to generate jobs for those negatively impacted by globalization. Post-2008 such growth has been anaemic – in part because of the trade policy responses captured in the data discussed above (IMF, 2016). Slow growth has in turn helped to generate political opposition to trade agreements and the WTO as visible embodiments of globalization.
Disquiet about the effects of globalization is not a global phenomenon – most citizens in developing countries tend to be more positive about globalization (Bluth, 2018). In high income countries, drivers of discontent are varied. Many have little to do with the policy areas spanned by the WTO. Concerns relating to migration, tax avoidance by large multinational companies, financialization of the economy, the treatment of foreign investors (e.g., opposition to bilateral investment treaties that permit foreign investors to contest regulatory changes adopted by host govern-ments) are all policy areas that are only partially covered by the WTO, if at all. Trade arouses less concern among citizens in developed and developing countries than do other dimensions of globalization (Bluth, 2018).
This does not mean trade and the trade regime do not raise concerns. Of increasing import are views that firms based in foreign countries with weaker regulatory standards or that benefit from competition distorting policies may engage in unfair trade. Such perceptions are not restricted to the context of trade between high-income and devel-oping nations. They were a significant factor in mobilizing resistance in the EU against trade agreements with Canada and the US, i.e., countries with similar levels of per capita income and regulatory standards. They illustrate that consumer preferences are an important factor in the design of cooperation on trade-related policies.
The WTO leaves countries free to define for themselves the goals of their regulatory regimes, subject to measures being implemented on a non-discriminatory basis, not unnecessarily restricting (distorting) trade and conforming to procedural criteria that have been agreed by all Members (e.g., relating to transparency). Notwithstanding this, perceived threats to regulatory sovereignty and worries that governments may be constrained in their ability to enforce or change domestic health, safety, labour and environmental regulations underpin the concerns many civil society organizations have regarding the operation of the trade regime and efforts to deepen trade cooperation. They are also a factor underlying perceptions by businesses that they confront ‘unfair’ competition from firms lo-cated in countries deemed to have ‘lower’ standards.
Likewise, many developing countries fear that product standards and related regulatory disciplines applied in import markets may be used to create obstacles to their exports. This explains opposition to efforts to extend the reach of the WTO to encompass disciplines on political and civil rights, labour standards or protection of the environment – a direction of travel that is embodied in the trade strategies of many higher-income countries and reflected in recent PTAs these countries have negotiated. In the case of nonreciprocal trade preferences, linkages between duty-free access and social and environmental standards regulation are now common, viz. the GSP+ regime applied by the EU.
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Such linkage is a contentious matter in the WTO and has been the subject of decades of debate. Most developing countries have taken the view that the WTO, as a trade organization, is not the right place to negotiate on political, civil and social rights. Regarding their effects on competition, many developing countries also argue against this "burning the bridge after crossing the river" – noting that high-income country proponents were not subject to inter-national disciplines when they industrialized. Concerns that “unfair competition” arguments are a disguised manoeuvre to deprive lower-income economies from benefitting from their comparative advantages have been a prominent feature of developing country perspectives on this matter. Thus, many countries have opposed efforts to agree to WTO rules pertaining to labour or environmental standards, although bodies have been created to discuss some such matters – e.g. the Committee on Trade and Environment.
Concerns about safety, sustainability or social conditions in workplaces where imported goods are produced have been augmented as a result of the spread of complex international value chains. These entail a need for national regulators to cooperate more with foreign counterparts. Similarly, worries about the way intangible products are produced and traded (transmitted) through global information and telecommunications networks call for cooperation to ensure efficient realization of national regulatory objectives. Such cooperation can lower trade costs for firms as a side benefit, but their primary driver is to achieve more effectively non-trade objectives. An important question is whether and how the WTO can help support such ‘win-win’ regulatory cooperation. This may only be feasible among subsets of the WTO membership – a matter we return to below.
The trade order embodied in the WTO presumes trade is undertaken by firms that operate on a commercial basis. No matter what type of economic system prevails in a country, firms may seek and obtain support from governments that distorts competition and trade. This has led to the negotiation of rules to govern such assistance, reflected in different WTO agreements – e.g., the Agreements on Subsidies and Countervailing Measures and on Trade-related Investment Measures. The presumption, however, is that firms are free to operate their businesses as they see fit, that is, trade rules were designed to regulate relations between private agents that pursue only commercial inter-ests. The accession to the WTO of countries where state-owned enterprises account for a significant share of economic activity tests this central presumption.
Whether and how the trade regime should govern the policies of countries where the State plays a significant role in the economy has become a prominent question for many WTO members. Although China is the primary focal point in this regard, other countries also have economies where State influence or control is substantial. More generally, governments use a mix of policy instruments that affect competition on markets – including subsidies or fiscal incentives to attract or retain investment. This is not a new question for the trading system or for trade agree-ments, but it is one that is particularly important to address to reduce current trade tensions. As discussed below, doing so requires policy dialogue with a view to identifying the magnitude of negative effects of specific policies and approaches that reduce potential adverse impacts on foreign producers and distortions to competition.
Differences in policy choices, preferences, standards and economic systems more broadly are not the only source of potential trade tensions. It is sometimes argued that macroeconomic policy stances are another factor that de-termine whether a country’s trade relationships are equitable. Macroeconomic policies, including fiscal and monetary policies that impact on the government budget and influence patterns of saving and investment, may be reflected in trade and current account balances. Arguments that large bilateral trade imbalances are an indicator that a trading partner is engaging in practices that distort trade flows is misconceived. Countries have different comparative advantages. These give rise to the gains from trade.
Countries with comparative advantage in a specific industry will be net exporters of the products of that industry, and net importers of goods and services in which they have a comparative disadvantage. Adding up across all industries and products, this may result in bilateral surpluses or deficits. Views that fairness requires trade to be balanced across all bilateral flows or that to benefit from trade a country must have a bilateral trade surplus are misguided. Moreover, a country’s overall current account balance is not affected by trade policies but by its mac-roeconomic policies and how these impact on national savings and investment. Countries that in the aggregate save more than they invest (or consume less than they produce) will run current account surpluses. The size and
